Finnish Business Management Championships - Cesim · PDF filesome rounds depending on the...
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Finnish Business Management Championships
Decision Making Guide 2011
Talent Adventure Oy
Liikkeenjohdon Suomen mestaruus
Tammasaarenkatu 1
00180 Helsinki
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1. Finnish Business Management Championships
1. Menu bar enables you to navigate between different sections of the user interface.
2. Here you can send e-mail to your team members or administrators to the addresses they have
provided on registration.
3. Here you can see some quick details on the overall market situation.
4. Here, under “Closest deadline”, you can see how much time you have left until the next
deadline and the time for that deadline; both in your time and system time. This is useful when
participants are in different time zones. Teams can use system time to communicate internal
deadline and organize teamwork.
5. Here you can see the team decision log. It gives detailed information on how your team’s
decisions were ultimately made.
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2. Decisions
2.1 Decision making flow These instructions will help you as you go through the decision making tool for the first time. In the
beginning, you may want to follow the decision making flow that is presented here. Later, when you are
more familiar with the model, you can make decisions as you prefer.
It is useful to print these instructions before you start working on your decisions.
2.2 Successful decision making flow
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2.3 General issues related to decision-making The decision- making process starts with analyzing last round’s results which can be found under the
Results tab. After analyzing the results, you can start making decisions. If you looked at round 1 results,
you will start making decisions for round 2. In the beginning of the game, results called initial round
results are available and you start by making practice round decisions. After the practice round, the
situation is reset back to initial and you will be playing the round again, now called the first round.
You can enter the decision-making area through the Decisions tab. The decision making area consists of
several pages with different functions. On the right side of the decisions submenu, you can find the
Decision Checklist page. It contains all of your and your team members’ decisions as well as your team’s
decisions. Team decisions are used to calculate your results for this round. Be sure to check that your
team’s decisions are what you wanted them to be before the round deadline.
Other pages are used for decision making. The rest of this manual helps you to make all the decisions
that are required to complete a round. The Decision-making area functions as a budgeting tool as well as
a decision making tool – it consists of supporting calculations and three kinds of inputs.
1. In the white cells you enter your decisions. Some decisions like production target and price are
very important to make every round, while some, like investments, need to be made only on
some rounds depending on the strategy of your team.
2. In the blue cells, you enter estimates of how the market will develop, what your market shares
are, and so on. These estimates will not be used when calculating results but are used as the
basis for the budgets sown in the system. Thus, if you want reliable projections, you need to
input accurate estimates.
3. Drop-down menus are used in certain decisions where there is a defined set of specific options
to choose from.
The effect of a change in a decision or estimation cell is instantly calculated and updated to budgets and
projections. You’ll be able to see the changes immediately every time you have made changes.
If you leave the decision making area, decisions that you have made (and projections that are calculated
after your last input) are automatically saved and will be available when you enter the area next time.
After you have made decisions, you can decide whether you want to use your decisions as your team’s
decisions. If yes, then press the COPY- button under your name on Decision Checklist page. You can
always check your team’s latest decisions on the Decision Checklist, as well as save an alternative set of
decisions as the team’s decision set.
Now you should feel a bit more comfortable entering the actual decision-making pages. Following
chapters will take you through the recommended steps of decision-making process.
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3. Market conditions
1. It is very useful to read the market outlook before you start to make decisions. Outlooks contain
important information on possible future developments and will help you in anticipating market
movements.
2. At the bottom of the page you’ll find a dedicated tab for parameters. These parameters (costs,
exchange rates, tax rates etc.) are presented for the current and the previous round. Together
with the ones that are not shown here, these parameters define your business case and you can
take advantage of this information for example when planning for taxes, logistics or
investments.
NOTE: Quantitative parameters, such as tax rates, are forecasts for the period and they tend to be
rather accurate. Market development on the other hand can be different from the market outlook due
to the fact that the markets are influenced by competing companies’ actions in the markets. Therefore,
market growth may not actualize exactly as predicted.
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3.1 Demand
1. It is good to start decision-making by estimating total market growth for each market area. The
information on the Market Conditions-page is useful for making these estimates.
2. After estimating market growth you can choose which technology products you sell in each
area. The maximum number of products in each area is two. In the beginning your company has
only one technology ready for production and sales. Later in the game it’s possible to research
and manufacture more sophisticated technologies. (See chapter Research and Development
about new product development.)
3. Now that you have chosen which technologies to sell, you estimate market shares for each of
these products in all of the markets. These forecasts are used when the model calculates your
company’s pro-forma statements and budgeted production figures. Last round column, on the
left side of your market share estimation, shows the market shares that the company actually
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had during the previous round. Total market shares for this and last round can be seen on the
far right side for all three regions.
4. When you have estimated total market growth and your market share, you can see the
expected demand in each area here. Keep in mind that these are only your estimations; the final
figures will depend on how well you succeed in your decisions relative to the competitors. (See
chapter Demand, total market and market share.)
5. These graphs give projections on planned infrastructure improvements of all four technologies.
The higher the infrastructure technology coverage level, the more demand that technology
potentially has.
3.2 Demand, total market and market share Demand for a team is determined in three steps.
At the bottom of the Demand page there are graphs showing the development of the different
technologies. The infrastructure for the technology is a pre-requisite for demand, i.e. there are no sales
for the technology unless the infrastructure is in place. The graphs present the progress of each
infrastructure. For example, the figure 50% on the U.S. graph indicates that 50% of the geographical
area in the US is covered with this technology.
Technology infrastructure coverage is an important factor in determining the demand for the gadgets in
new technologies. Inhabitants outside the infrastructure coverage of any given technology do not
purchase gadgets of that technology. New technologies tend to be more attractive than old ones and
thus generate more demand. However, sometimes a new technology may turn out to be a flop on some
of the markets. The market outlooks give more insight on the expectations of new technologies. The
division of demand between technologies is also strongly affected by:
Price level (a new technology is normally priced higher than the old)
The number of companies offering products in that technology
Marketing efforts
For example, pricing the new technology twice as high as the old reduces the attractiveness of that
technology by at least 50% (this is if the price elasticity of demand is -1).
1. Total market size for each market area is calculated. Market outlooks provide a good forecast of
what is going to happen in the future.
2. The total market demand is divided into different technologies.
3. The market shares for each company are determined. The factors affecting the market share
are: the number of offered gadget features, average selling price, promotion and previous round
market share.
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3.2.1 Total Market & Company Market Share
1. Factors affecting the total market size:
a. Economic conditions
b. Average price level
c. Average promotion budget
d. Technological evolution
2. Factors affecting technology’s share of the market
a. Technology price level
b. Technology promotion
c. Number of companies offering each technology
d. Infrastructure technology coverage
e. Technology attractiveness
3. Factors affecting the market share of one company for the technology
a. Price
b. Promotion
c. Number of offered gadget features
d. Previous round market share
e. Number of companies offering the technology
In the beginning everyone has the same market share, but as soon as you start making decisions, the
market shares start changing. The picture below illustrates an imaginary situation with four different
teams.
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3.2.2 Market shares
1. Team Yellow
2. Team Purple
3. Team Blue
4. Team Green (further split into two technologies)
5. Team Green’s Tech 1 has a 25% share of the total market
6. Team Green’s Tech 2 has an 8% share of the total market
By combining the market share of these two techs we get a market share for the whole company: 33%
of the total market. Remember, when estimating demand percentages for products, that your
percentage estimate is a percentage of the total market share for all mobile devices. Not a percentage
share of the demand for that specific technology.
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4. Production Global allocation of production is an important success factor in this simulation. You have two
production areas (USA, Asia) that you can use to supply to the three market areas. There are no finished
goods inventories. If you overestimate your demand and make too high production decisions, the
production will be reduced automatically to match the demand. There is an additional cost if production
needs to be adjusted during the round. Note that your production will not be increased if your demand
turns to be higher than estimated. In that situation you will have lost sales.
1. Here you can choose which technologies to produce in each production line and how much of
the production line capacity you allocate to each product. With two areas and two production
lines in each area you can do any combination of four technologies. In this example, production
lines 1 and 2 are in use both in USA and Asia.
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2. The simulation automatically calculates the unit cost (see chapter production costs). The scarp%
depends on the maturity of each technology in production. Scarp% is taken into account in the
unit cost.
3. Here you can decide how much production is allocated to contract manufacturers. Only
technologies chosen for production at your own production lines can be allocated. There is a
limit how much you can choose to contract manufacture during each round. The cost of contract
manufacturing is also given here and it varies according to the manufacturing amount. In this
example, production is allocated to contract manufacturers in USA but not in Asia.
Food for thought: When you are deciding whether you should put a buffer in your capacity allocation in
order not to lose sales or whether you should go without any excess capacity you need to compare the
opportunity cost of lost sales with the cost of extra capacity. Opportunity cost for lost sales is equal to
the lost sales margin for each product that you do not sell and the cost of extra capacity equals to the
cost of having to cut the production during the round. In addition, if you overestimate the demand your
logistics will not be completely optimized because each production site attempts to maximize their
production and the excess capacity will be automatically divided between the areas.
4.1 Production costs The factors affecting the production costs are the following.
Basic cost level in the production area
Production cost function (U-shaped curve)
Learning curve effect
Penalty for having a too high production target. This happens if you have over-estimated your
demand since your production needs to be reduced during the period. This penalty represents
roughly 5% of your production cost.
The U-shaped production cost function can be seen below. Cost multiplier is used to multiply the basic
cost level.
1. Cost multiplier
2. Capacity utilization
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The Basic cost level indicates the cost for producing the first unit of the new technology. Due to lower
initial employee skills/efficiency, the basic cost is higher in Asia than it is in the US. The learning curve
effect is a significant factor affecting the production costs. The X-axis represents the cumulative GLOBAL
production of certain technology. Notice that you can first produce products in USA and then start
producing in Asia when the learning curve has reached a certain level. The example below illustrates the
logic.
1. Unit cost USD
2. Global cumulative production per technology
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4.2 Investments
1. Here you estimate global demand for the next two rounds. This year’s demand is based on the
estimates made on the Demand page. Future projections are important because it takes two
periods to complete new production facilities.
2. Based on your future growth expectations you can decide to invest into new production
facilities in USA and/or Asia. They will be available for production two periods from now and you
have to pay for them one period from now (middle of the investment cycle).
3. This graph contains information on how your demand and capacity are projected to develop.
The graph is a good tool in visualizing the relationship between your estimated demand and
capacity.
Food for thought: When you make a plant investment you are committing a substantial amount of
money into a long-term investment. You need to make sure that you can pay for the investment with the
revenue that you are making from it. We can try this calculation: price of the plant is 160 mUSD,
economical life of the plant is about seven years and plant capacity is 550 thousand units. You can sell
your products in the future at about the same price as you are doing currently in the US, about 200 USD.
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Also, your average operating profit before depreciation (all operating costs except plan depreciation are
deducted from the sales revenue) is about 35%. When you multiply the annual plant production capacity
(We assume that you can use the plant at an average 90% utilization rate) by the expected margin per
product you get about 35 mUSD (550 tUnits x 90% x 200 USD x 35%) operating before depreciation. From
this money you will need to pay for the depreciation and financing costs of the plant. Here depreciation is
calculated as 15% depreciation on declining balance. This gives you a depreciation of 24 mUSD (160
mUSD x 15%) for the first year of operations. (Declining balance emphasizes the first years over the last
ones, which is reasonable in this kind of high-technology business environment.) After depreciation you
have 11 mUSD (35 mUSD – 24 mUSD) left to cover for financing and investor risk.
Return on investment (ROI) in this example is 6,9%. That is calculated by dividing Operating profit (EBIT)
by the cost of the investment (11 mUSD / 160 mUSD).
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5. Marketing On the marketing page you decide your marketing mix, namely; product, price and promotion. These
decisions need to be made for each product and market area. Since you have only one product (based
on Tech 1) in each market in the beginning, you need to make these decisions for one product only in
each area. As soon as you have more than one product, you will make the decisions for both products
separately. It is important to keep in mind that the success of your marketing mix will be determined by
the markets. Customers are comparing between different alternatives and making their purchase
decisions accordingly.
1. The first decision you make is deciding the number of gadget features offered. More features
cover more of the various customer preferences but also cause more costs.
2. Price and promotion decisions are set here. Pricing decisions are always made in the currency of
the area and promotion always in USD.
3. As soon as you have decided about product, pricing and promotion, you can see your budgeted
financial outcome here.
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4. Here you can also see where your products are coming from.
Implementing different product features causes feature costs. You can implement 1-10 features to your
products and each feature carries additional costs. Features can only be implemented if your company
has reached the respective technology competence level either by investing to own R&D or by buying
licenses from outside. Feature costs can be calculated by multiplying the number of features by the cost
per feature (reported in PARAMETERS).
Marketing affects not only the demand for the product, but also the company’s image in the particular
market area. Thus advertising has a long-term effect.
Food for thought: When you make your promotion decision (advertising), you should look at the sales
margin that you can generate from that product in the specific market. Usually it is reasonable to “over-
spend” in the beginning when you are launching a new product. However, in the medium-term you must
be able to pay for all your advertising of the product with the sales margin that the product brings in. A
useful rule of thumb is to allocate the amount that equals to sales margin multiplied by advertising
elasticity (roughly 0,1-0,3).
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6. Logistics
1. Here you can choose in which order you will satisfy your demand in the markets. In this example
you have chosen 1. USA, 2. Asia, 3. Europe for production from the USA, meaning that US made
products are first delivered to the USA, then to Asia, and finally to Europe. This decision is only
relevant if your global supply is not enough to fully satisfy your global demand. If that should
happen, supplies will first be cut from the third market (Europe), then from the second market
(Asia) and lastly from USA.
2. With transfer pricing you can adjust your profits between different units and you can make
other business units participate in R&D and other fixed costs.
Transfer pricing can also be used to benefit from different tax rate between countries.
The multipliers must be between 1 and 2.
3. In this block you can see where your products are made and where they are expected to be sold.
Total cost of transporting products is the actual transportation cost + tariff. Transportation costs
and tariffs are reported in PARAMETERS. There is no transportation cost for products that are
sold in the same area they are produced in.
Food for thought: When you set the delivery priorities you should attempt to maximize your total margin
from the products. This can be achieved by prioritizing those markets where unit margins are the highest.
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In other words, if you run out of supply, you want to make sure that it happens in the market where your
unit margin is the lowest.
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7. Research and Development There are two ways of improving your company’s technological capabilities: own R&D and license
purchases. Own R&D has a one period delay before the technologies and features become available for
production. License purchases are available immediately. They are both substitutable and
complementary ways of building competence, which means that you can first invest to your own R&D
then decide to buy a license and then improve the technology further by your own R&D again. You can
use any combination of the two to reach the desired level of technologies and gadget features.
1. In these cells you make decisions about your own R&D investments into each technology. The
model tells you how much you need to invest in order to make a new technology available or a
new set of gadget features for an existing technology. You need to keep in mind that all results
from your own R&D investments are available with a delay of one period.
2. You can complement own R&D by buying technology and design licenses. Whereas own R&D
has a one period delay, license purchases make the technologies and features available
immediately. This is a one-time payment that gives the rights for the technologies and features
indefinitely.
3. This graph shows the number of handset features available in each Tech.
Food for thought: R&D investments are very strategic in nature and it is difficult to apply any exact
investment calculation method on those. Even at best, those calculations include heavy assumptions and
uncertainties. However, at least when you consider investments into new handset technologies, you
should think how many devices you must sell in order to recover the money that you spent on the
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development. Following you competitor may not be the best alternative, since they can go wrong with
their investments.
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8. Finance Financing decisions are typically the last set of decisions that you are making. All financial market
transactions are managed through the parent company (USA). You decide about:
Increases (+) and decreases (-) in long-term loans
Share issues and buy-backs
Dividend payments
Treasury management (transferring funds between group companies)
Share issues and buybacks are made according to the market valuation at the beginning of the round.
The number of shares issued (repurchased) affects issue (buyback) price.
You can also transfer funds between different countries by internal loans (International Treasury
Management). You may want to use internal loans if you have accumulated substantial cash reserves in
Asia or Europe that can be repatriated and distributed to the owners, or you need to finance some plant
investments in Asia.
Cash at the end of the year cannot be below a minimum requirement (usually 2 million USD, shown as
2000 tUSD). If cash falls below this requirement, the financial department fills that gap automatically by
taking short-term debt. Short-term debt is paid automatically when possible and it is usually more
expensive than long-term debt. Therefore it is advisable to try to avoid short-term debt. The difference
between short- and long-term interest rates (Premium for Short-Term Debt) is reported in
PARAMETERS.
It is also good to keep in mind that the idea is not to minimize the cost of debt, but to maximize the
return on equity. The winner of the game is determined by the total shareholder return, which
measures the return that the team is able to generate for the shareholder during the simulation rounds.
It takes into account the changes in the share price and dividend payments.
8.1 Suggestion for capital structure decisions in case you have
accumulated excess cash After financing the group companies in Asia and Europe check the cash situation in the USA. If you have
excess cash, you can consider the following logic:
1. Check the capital structure. As a rule of thumb, you should try to keep the equity ratio (equity
divided by total assets) in the range of 40-60%. If it is less than 40%, it is more beneficial to re
pay debt than to pay a dividend. If it is more than 60%, you are probably not taking full benefit
of the tax shield effect (related to the Weighted Average Cost of Capital, WACC).
2. Decide what amount of cash is needed as a “safety buffer” for your operations. Remember, that
if you don’t have enough planned financing to run the operations, the system will automatically
take short-term loans to sustain liquidity and the short-term loan premium is high in this case.
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The more uncertainty you have in your sales estimations and budgets, the higher should your
cash buffer be.
3. Pay dividends according to your dividend policy.
4. If you still have too much cash, pay the excess out to the owners. You have two complementary
alternatives:
a. Share buybacks. If you buy back shares, you improve EPS (repurchased shares are
cancelled immediately). However, this should be done over a longer time period since if
you attempt to buy large amounts at once, you create demand in the market and the
average buyback price goes up.
b. Pay extra dividends. Dividend payment will be taken into account as part of the total
shareholder return. (Money is transferred from the company cash box to the
shareholder’s cash box).
In reality the weight between share buybacks and extra dividends is mainly driven by taxation. Since we
only consider corporate tax in the simulation the recommendation is that you set a dividend policy that
is in line with your long-term profitability and if you are generating excess cash, spend that on share
buybacks. In case you have so much cash that spending that all on share buybacks will increase the
average buyback price too much, use extra dividend payments to balance it off.
And of course, timing itself is a big challenge. The old investor rule “buy low, sell high” applies in
corporate equity transactions as well.
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1. Here you can make the finance decisions. I.e. increase (+) / decrease (-) long term loans,
issue/buy back shares and pay dividends.
All finance decisions are done at the parent company (US) and while doing those it is useful to
observe the parent company’s cash flow statement on the right.
2. In this picture you can see the capital structure of the company. It is reasonable to try to keep
approximately equal amounts of debt and equity on the balance sheet.
3. Here you can transfer funds between different countries. Blue bars indicate cash reserves and
green bars indicate local debts. It is usually recommended to finance Asian and European
operations through the parent company in the US.
Food for thought: The reason why you should keep approximately equal amount of equity and debt on
your balance sheet is that by doing this you minimize your cost of capital. The smaller the cost of capital,
the higher is the net present value of all your company’s future cash flows, thus the higher is the market
value of your company. Another way to think of the same is that the lower the cost of capital, the more
you have investment opportunities that exceed the cost of capital (=more business).
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9. Budgets Budgets are located at the bottom of the page and can be quickly accessed from any decision-making
page. By clicking any of the budget tabs a corresponding budget will be overlaid on top of the page you
were observing. Budgets update continuously as you make decisions. Here you can follow profitability
for the group as a whole and for each area separately. Key financial indicators are also presented here.
Notes to the Profit and Loss statement:
In this simulation all R&D and marketing (promotion) costs are expensed on the profit and loss
statement during the period the investments are made. As a consequence, profit for the year may
fluctuate depending on the intensiveness of R&D and marketing investments.
R&D is considered to take place in the area(s) where you have production plants. I.e. if you have
production plants only in the US, your entire R&D expense shows in the USA Profit & Loss statement.
When you have production in Asia as well, R&D will be split between the countries relative to the
number of production facilities. You can use transfer pricing to roll R&D costs to other areas (Asia,
Europe).
Administration costs include the company’s overhead costs i.e. the company’s fixed costs, which are not
allocated to the different products. Part of the administration cost belongs to the service and
maintenance of production facilities. Administration costs include basic cost per market area and an
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extra cost that depends on the number of plants. The administration costs per one plant decreases
when the number of plants in the area increases.
10. Calculation of key financial ratios
Return on sales (ROS), % =
Equity ratio, % =
Net debt to equity (gearing), % =
Return on capital employed (ROCE), % =
Return on equity (ROE), % =
Earnings per share (EPS), % =
(Following ratios are available only in the results-section after each round)
Dividend yield, % =
P/E ratio =
Cumulative total shareholder return, % (winning criteria!)
100% * [ (
) * (1/this period) - 1 ]
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Notes on the balance sheet:
Cash adjusts automatically if the company has excess cash available, i.e. money that is not used in
investments or financial transactions.
Receivables and payables are automatically calculated as a percentage of sales and production costs.
Other restricted equity indicates the difference between share issue/buyback price and the nominal
value of the share (10 USD).
Short-term loans are taken automatically if the company does not have enough liquidity to run the
operations.
Food for thought: Since your goal in the simulation is to maximize the shareholder value, you should aim
to run the company with as small a balance sheet as possible without jeopardizing your current profits
and your future growth opportunities. If you can generate the same profit with a lighter balance sheet
you have utilized your assets more effectively and thus you need less money from investors.